FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2020

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

NOTE 9 — FAIR VALUE MEASUREMENTS

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available. Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs:     Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 Inputs:     Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 Inputs:     Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth as follows.

Financial Assets Measured at Fair Value on a Recurring Basis

At September 30, 2020 and December 31, 2019, securities measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)
September 30, 2020	Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgaged-backed		—		59,789		—		59,789
Other		—		11,107		—		11,107
Other mortgage backed debt securities		—		35,111		—		35,111
Obligations of state and political subdivisions		—		146,878		—		146,878
Asset backed securities		—		41,376		—		41,376
Corporate debt securities		—		22,260		—		22,260
Total debt securities available-for-sale		—		316,521		—		316,521
Marketable equity securities		1,393		—		—		1,393
Total recurring fair value measurements	$	1,393	$	316,521	$	—	$	317,914

(Dollars in thousands)
December 31, 2019	Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	—	$	2,855	$	—	$	2,855
Obligations of U.S. Government Agencies and Sponsored Agencies:
Mortgaged-backed		—		77,283		—		77,283
Other		—		10,297		—		10,297
Other mortgage backed debt securities		—		11,138		—		11,138
Obligations of state and political subdivisions		—		120,376		—		120,376
Asset backed securities		—		37,536		—		37,536
Corporate debt securities		—		18,443		—		18,443
Total debt securities available-for-sale		—		277,928		—		277,928
Marketable equity securities		1,933		—		—		1,933
Total recurring fair value measurements	$	1,933	$	277,928	$	—	$	279,861

The estimated fair values of equity securities classified as Level 1 are derived from quoted market prices in active markets; these assets consist mainly of stocks held in other banks. The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies. The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Company (observable inputs), and are therefore classified as Level 2 within the fair value hierarchy. The Company does not have any Level 3 inputs for securities. There were no transfers between Level 1 and Level 2 during 2020 or 2019.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At September 30, 2020 and December 31, 2019, impaired loans measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at September 30, 2020
Impaired loans:
Commercial Real Estate	$	—	$	—	$	6,163	$	6,163
Residential Real Estate		—		—		151		151
Total impaired loans	$	—	$	—	$	6,314	$	6,314

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at December 31, 2019
Impaired loans:
Commercial Real Estate	$	—	$	—	$	6,218	$	6,218
Residential Real Estate		—		—		221		221
Total impaired loans	$	—	$	—	$	6,439	$	6,439

These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs. There were no transfers between valuation levels in 2020 and 2019.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At September 30, 2020 and December 31, 2019, foreclosed assets held for resale measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at September 30, 2020
Foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	—	$	—
Total foreclosed assets held for resale	$	—	$	—	$	—	$	—

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at December 31, 2019
Foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	81	$	81
Total foreclosed assets held for resale	$	—	$	—	$	81	$	81

These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. There were no transfers between valuation levels in 2020 and 2019.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine the fair value:

(Dollars in thousands)	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value					Weighted
September 30, 2020	Estimate		Valuation Technique	Unobservable Input	Range	Average
Impaired loans - collateral dependent	$	3,346	Appraisal of collateral1,3	Appraisal adjustments2	(15%) – (87%)	(18%)
Impaired loans - other	$	2,968	Discounted cash flow	Discount rate	(7%) – (8%)	(7%)
Foreclosed assets held for resale	$	—	Appraisal of collateral1,3	Appraisal adjustments2	(0%) –(0%)	(0%)
December 31, 2019
Impaired loans - collateral dependent	$	3,419	Appraisal of collateral1,3	Appraisal adjustments2	(10%) – (77%)	(17%)
Impaired loans - other	$	3,020	Discounted cash flow	Discount rate	(7%) – (8%)	(7%)
Foreclosed assets held for resale	$	81	Appraisal of collateral1,3	Appraisal adjustments2	(35%) – (35%)	(35%)

¹ Fair value is generally determined through independent appraisals of the underlying collateral, as defined by Bank regulators.

² Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.

³ Includes qualitative adjustments by management and estimated liquidation expenses.

Fair Value of Financial Instruments Measured on a Nonrecurring Basis

(Dollars in thousands)	Carrying		Fair Value Measurements at September 30, 2020
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	9,627	$	9,627	$	—	$	—	$	9,627
Interest-bearing deposits in other banks		36,349		—		36,349		—		36,349
Time deposits with other banks		247		—		254		—		254
Restricted investment in bank stocks		2,247		—		2,247		—		2,247
Net loans		696,461		—		—		726,242		726,242
Mortgage servicing rights		277		—		—		277		277
Accrued interest receivable		4,730		—		4,730		—		4,730
FINANCIAL LIABILITIES:
Demand, savings and other deposits		719,553		—		719,553		—		719,553
Time deposits		199,666		—		202,469		—		202,469
Short-term borrowings		23,123		—		23,128		—		23,128
Long-term borrowings		45,000		—		47,502		—		47,502
Accrued interest payable		398		—		398		—		398
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

(Dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2019
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	10,251	$	10,251	$	—	$	—	$	10,251
Interest-bearing deposits in other banks		473		—		473		—		473
Time deposits with other banks		247		—		250		—		250
Restricted investment in bank stocks		4,224		—		4,224		—		4,224
Net loans		640,727		—		—		655,301		655,301
Mortgage servicing rights		283		—		—		283		283
Accrued interest receivable		3,405		—		3,405		—		3,405
FINANCIAL LIABILITIES:
Demand, savings and other deposits		526,564		—		526,564		—		526,564
Time deposits		235,064		—		235,134		—		235,134
Short-term borrowings		54,663		—		54,655		—		54,655
Long-term borrowings		55,000		—		55,809		—		55,809
Accrued interest payable		606		—		606		—		606
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—